Save your 401k from this common mistake

Multi-manager funds sound like a good idea, but too many cooks in the kitchen can muddle a fund's performance and hurt your nest egg

By InvestorPlace Apr 20, 2010 10:21AM

By Dan Weiner, editor of Fund Focus Weekly


401k investing nest eggVanguard announced last week that it's handing an 8.5% piece of the Vanguard Windsor II Fund (VWNFX) to Sanders Capital, and in particular John Mahedy, who used to work on Windsor when he was at AllianceBernstein.

Unfortunately, rather than give Mahedy and his team a mandate to run a value fund, Vanguard is simply continuing to add chefs to the Windsor II kitchen, and the meal gets less and less tasty with each one.


I’m one of the leading experts on Vanguard funds, so this is particularly irksome to me. But the bigger lesson that you can take away from the increasingly messy management of Windsor II is that multi-manager funds are almost always bad news for your 401k. And here’s why:


First, let’s dissect the problems at VWNFX so you can see some specifics. In the following graph, the blue line shows the performance of Windsor II against the Russell 1000 Value Index benchmark. When the line is rising, Windsor II is outperforming the benchmark. When it is falling, Windsor II is underperforming. Between 1991, when Vanguard added its internal team to Windsor II's mix, and the subsequent hiring and firing that's occurred over the past 16 years, Windsor II has failed to match, much less beat the benchmark, as the falling line shows.


vanguard 401k mutual funds graph 

Since the last manager change in January 2007, the line has been rising, indicating improving relative performance, but this represents a fairly short period over the fund's multi-management timeline. The addition of yet another manager doesn't necessarily bode well for Windsor II's shareholders -- and could even counter gains made in recent months.

So here’s the payoff to all investors regardless of whether they own Windsor II: Beware of multi-manager strategies like this. Though these graphs are specific to VWNFX, the story can be repeated a hundred times over for other mutual funds that are managed by too many people to be truly effective.


Vanguard (along with its mutual fund compatriots T. Rowe Price, Fidelity and others ) claim that multi-managers add to diversification. The is some truth to that, but what these investment companies can't point to is improved performance from its multi-managed funds.


Good luck getting them to admit that, though.

The bottom line is that there is such a thing as too many cooks in the kitchen. Not only do more managers mean more suits looking for a chunk of your 401k money via fees and other expenses, it also means that any clear strategy for your nest egg is diluted. Management by committee indeed reduces risk, but as Windsor II shows it also reduces returns.


Don’t be fooled by multi-managed funds that suffer from committee rule. One good leader at the helm is all a successful 401k fund needs.


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